Unit 02

• Macroeconomic policy objectives

  • High economic growth
  • Full employment/low unemployment
  • Price stability (low inflation)
  • Favourable balance of payments
  • Sustainable development
  • Reduce income inequalities
  • Balanced government budget
• The circular flow of income

  • It is the flow of goods and services between households and firms and their corresponding payments in money terms.
• Injections into the CFI

  • Investments
  • Government spending
  • Exports
• Withdrawals from the CFI

  • Savings
  • Taxes
  • Imports
• Injections and Withdrawals

  • Injections are an addition to the CFI which does not arise from current consumption. An increase in any of these will cause national income to rise by more than the initial expenditure due to the multiplier effect.
  • Withdrawals are income that is not passed on within the circular flow during the current time period i.e. withdrawn from the CFI.
• National income

  • It is calculated every quarter by using a sample of the population.
  • It can be calculated via the income method, expenditure method, or the output method.
  • Income is usually measured by GDP.
• GDP (Gross Domestic Product)

  • It is the total market value of all goods and services produced by the factors of production located in a country.
• Nominal and real GDP

  • Nominal GDP: this is the GDP at market price.
  • Real GDP: GDP at market prices adjusted for inflation.
• Recession and recovery

  Recession: 2 consecutive quarters of negative economic growth.

  Recovery: 2 consecutive quarters of positive economic growth.
• Different measurements of national income

  • GDP: Gross Domestic Product
  • GNP: Gross National Product
  • NNP: Net National Product
  • GNI: Gross National Income
• Wealth and income

  • Wealth is the value of assets owned by a person/sum of all the assets in an economy.
  • Income is the money coming in from employment and other sources over time.
• Why is national income measured?

  • Improve our understanding of the economy.
  • Government policy could be directed towards improving the economy.
  • Success/failure of past government policies could be assessed accurately.
  • Growth figures influence confidence in the domestic economy.
  • For comparisons between countries and within countries.
  • Better understanding of the standard of living of people.
• Standard of living

  • Refers to the quality of life enjoyed by individuals in an economy. It could be measured by the amount of goods and services consumed by an individual in an economy.
• Factors affecting standard of living

  • Income distribution
  • Education level
  • Health
  • Amount of public infrastructure available
  • Working conditions
  • What the national income is spent on
  • The Human Development Index
  • Pollution levels
  • Cost of living and PPP exchange rate
• PPP

  • Stands for Purchasing Power Parity
  • Take into account how much of a typical basket of goods in one country costs compared to another.
  • It equalizes the purchasing power of currencies.
• Benefits of using GDP

  • Standard measure used in all countries
  • Quantitative measure
  • Indicates the wealth of a country
• Limitations of using GDP

  • Involves estimates from population samples
  • Does not take into account the size of the population
  • Some economic activity may be unrecorded
  • Does take into account the quality of the goods
  • Does not take the distribution of income into account
  • Don't reflect the differences in the costs of living
  • Does not reflect the amount of leisure that people enjoy
  • Takes no account of what is being produced
• Aggregate demand

  • It is the total planned expenditure on final goods and services in an economy.
  • It is the total amount of goods and services that all economic agents/groups want to purchase at any given level of prices in a particular time period.
• Components of AD

  • Consumption
  • Investments
  • Government expenditure
  • Exports
  • Imports
• Consumption

  • It is the spending on consumer goods and services over a period of time.
  • It is the largest component of AD.
• Marginal and average propensity to consume

  • MPC: The proportion of a change in income that is spent on consumption.
  • APC: measures the average amount spent on consumption out of total income.
• Factors that could change the level of consumption

  • Disposable income
  • Asset prices
  • Unemployment
  • Interest rates
  • Availability of credit
  • Consumer confidence and future expectations
  • Rate of inflation
  • Level of welfare payments
  • The savings ratio of the country
• Factors influencing savings

  • Real interest rate on savings deposits
  • Expectations of future income and job security
  • Consumer confidence
  • Availability of credit
  • Taxation on savings
  • Saving for retirement
  • Level of household debt
• Investments

  • These are the additions to the capital stock of the country.
  • Gross investment refers to the amount of capital goods that were bought during the year.
• Investments increase when...

  • Interest rates fall
  • Business confidence increases
  • Government influence
  • Expectation of higher profits increase
  • Availability of credit improves
  • Rate of economic growth increases
  • Retained profits rise
• Government spending

  • This includes the government's current spending, spending on public and merit goods, and spending on investment goods.
• Government expenditure is influenced by...

  • Fiscal policy
  • The level of economic activity
  • Correction of market failures
  • Political priorities
• Net exports are influenced by...

  • Exchange rate
  • Global economic conditions
  • Domestic economic conditions
  • Non-price competitiveness of goods
  • The level of protectionism
• Aggregate supply

  • Shows the relationship between the price level and the planned level of output firms wish to supply.
• Factors affecting short-run AS

  • Changes in domestic costs of production
  • Changes in the price of imported raw material/capital goods.
  • De-regulation
  • Reduced indirect tax rates
• Factors affecting long-run AS

  • Increases in the quantity and quality of resources
  • Improvements in productivity rates
  • Improvements in the quantity and quality of human resources
  • Higher level of R&D
  • Increases in net investment
  • Lower income taxes
  • Tax incentives for firms
• The multiplier effect

  • The number of times a rise in income exceeds the rise in injections that caused it.
• Multiplied contraction

  • When a decrease in an injection causes a more than proportionate fall in GDP.
• Economic growth

  • Refers to an increase in a country's real GDP or potential GDP over a period of time.
• Actual, potential, and sustainable growth

  • Actual: increase in equilibrium real GDP
  • Potential: increase in the productive capacity of the country
  • Sustainable: growth that does not compromise the ability of the economy to grow in the future
• Causes of economic growth

  • Higher consumption
  • Higher net investments
  • Government expenditure increases
  • Improvements in net trade
  • Increase in the number of workers
  • Increase in the quantity of natural resources
  • Improvements in technology
  • De-regulation/increase in competition
  • Incentives provided by the government
  • Improvements in productivity
• Benefits of economic growth

  • Improvements in living standards
  • Reduction in absolute poverty levels
  • High employment
  • Better social services due to improved government finances
  • Might attract more investments into the country
  • Consumers will be able to enjoy better quality and more innovative products
• Costs of economic growth

  • Environmental costs
  • Rapid depletion of non-renewable resources
  • Danger of inflation
  • Opportunity costs
  • There may be negative effects on the distribution of income
  • The current account of the BoP may deteriorate
• The output gap

  • This is the difference between the actual level of GDP and the productive potential of the economy.
• Positive and negative output gap

  • Positive (inflationary): when actual GDP is above the productive potential of the economy (boom period).
  • Negative (deflationary): actual GDP is below the productive potential of the economy (recessionary period).